The New Tax Deal: Are You a Winner Or a Loser?

After months of "will they or won't they?" Congress finally committed. On December 16, 2010, the House pushed through H.R. 4853 -- The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 -- virtually without changes. President Obama signed it into law the next day.

The tax deal, negotiated between President Obama and Congressional GOP leaders, received a lot of press. With all the grandstanding, it's hard to tell who the real winners and losers are under the deal. Here's our take:WINNERS: High-Income Taxpayers. In addition to an extension of the Bush-era tax rates, high-income taxpayers also benefit from a temporary repeal of the PEP (personal exemption phase-out) and "Pease" limitations. Under PEP, personal exemptions for high-income taxpayers were reduced as adjusted gross income (AGI) increased, while the Pease provision reduced itemized deductions at the top of the brackets. With the repeal, high-income taxpayers hold onto their exemptions and the full value of their itemized deductions for two more years.

LOSERS: Low-Income Taxpayers. While low-income taxpayers do benefit from the overall cut in taxpayer rates, the absence of the Making Work Pay Credit, which was not extended, will hit those in their wallets the most. Taxpayers making less than $20,000 (or married couples filing jointly making less than $40,000) will see a drop in their take-home pay of more than $200 compared to last year, since the Making Work Pay Credit was a higher tax break at a flat rate than the payroll tax break based on a percentage of wages.

LOSERS: Taxpayers Subject to Alternative Minimum Tax (AMT). On one hand, the bill contains a two-year patch for the AMT retroactive to January 2010, which will save more than 20 million taxpayers from the clutches of the higher tax this year and the next. On the other hand, more than 20 million remain subject to the tax (and more to follow in 2012), which still isn't indexed for inflation.

WINNERS: Individual Taxpayers. It's not just high-income taxpayers that catch a break with the extension of the Bush-era tax rates. Brackets remain low across the board, which means the 10% bracket remains in place at the bottom while rates for taxpayers at the higher end will be capped at 35%.

LOSERS: Homeowners Who Don't Itemize. In a bill that seemed to extend or renew nearly every credit from the Bush era, conspicuously absent was the property tax deduction for non-itemizers. The deduction was inexplicably left out of the bill.

LOSERS: Generation Y. Generation Y, or the so-called "Echo Boomers" because they are the children of baby boomers, find themselves in the odd position of benefiting from the payroll tax cuts in 2011 while also likely paying the price for it come retirement. In 2011, wage earner contributions to Social Security taxes are reduced by 2%, making contributions just 4.2% of wages to the cap ($106,800 in 2011). That amount is likely to be a significant savings for many taxpayers -- but at what cost? For those worried about the rate of depletion currently in the Social Security trust fund, cutting contributions while not modifying distributions only raises those concerns.

WINNERS: Taxpayers Who Die in 2011 and 2012.If the best year to die under the federal estate tax code was 2010 (when it was repealed for one year), 2011 and 2012 are looking like decent runners up. For the next two years, the top estate tax rate falls to 35%, the lowest since the 1930s, and the exemption rises to $5 million per person. That effectively repeals the tax for married couples who, with planning, can exempt up to $10 million from federal and gift tax.

LOSERS: Small Businesses. Small-business owners made some headway under the tax deal with lower capital gains rates and increased expensing options but lost out on the "wish list" at the top of many this year: a repeal of the expanded 1099 reporting requirements. The new reporting requirements are expected to increase administrative costs for small businesses in particular; Congress had promised some relief but offered none under the new law.

LOSERS: Fiscal Conservatives. The cost of the tax deal is a whopping $858 billion over two years. With little in the way of offsets, the new law adds to the federal deficit at a time when fiscal conservatives have retaken Congress. As the deficit continues to soar, they hope this tax deal won't come back to haunt them in 2012.

WINNERS: Investors. The bill extends the current tax rates on long-term capital gains and dividends for two more years. This is good news for investors who will see a top rate of 15% and a remarkable 0% for some taxpayers.

LOSERS: Moderate Democrats. Democrats lost a number of seats in the House in November. Adding insult to injury, many Democrats felt that their own President had turned on them when he negotiated a tax deal that seem to leave them out. With just a few days left in the lame duck session, it's clear that any power they once yielded is long gone.

WINNERS: Tax Pundits. This latest deal has given tax pundits a great deal to talk about over the last few months. Now, with a merely temporary extension, we have something to talk about in two more years.

All totaled, there are likely more winners than losers (at least by the numbers) in the tax deal. Whether that pans out won't be felt so much in January 2011, when the tax provisions were otherwise set to expire, as they will in November 2012 when voters have their say.

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Congress has passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 tax year.